ValueWalk’s interview with Hugh W. Brown Jr., Senior Manager, Investor Engagement on Water at Ceres. In this interview, Hugh discusses his company’s background, how the UN’s Sustainable Development Goals are impacting their mission, how other influential firms are addressing water risk, what makes SDG different than SRI and ESG, how big is the water crisis in the U.S. and globally, companies with higher exposure to water use and wastewater risk, helping investors navigate water risks across assets classes, and placing a higher value on water.
Can you tell us about Ceres and its work with investors on water?
Ceres is a sustainability nonprofit organization working with the most influential investors and companies to build leadership and drive solutions throughout the economy.
The Investor Water Hub (IWH) is a working group of the Ceres Investor Network which includes over 100 institutional investors, managing more than $20 trillion in assets, who seek to identify water risks, opportunities and impacts in their investment portfolios to more effectively engage the companies they own on water.
At this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More
How are the UN Sustainable Development Goals (SDGs) impacting your mission?
Ceres has mapped the SDGs to The Ceres Roadmap for Sustainability. The Ceres Roadmap is our vision for corporate sustainability leadership in the 21st century. It provides a framework for companies to create accountability for sustainability in order to increase business integration, ambition and scalable impact. While the SDGs provide a vision toward 2030, the Ceres Roadmap and its focus on embedding accountability to drive performance offers a path to get there.
How are ISS, BlackRock, CalPERS and other influential firms doing on addressing water risk?
Each has a unique vantage point from which to address sustainability and material water impacts: Blackrock as an asset manager, ISS as an ESG research provider, and CalPERS, as well as, CalSTRS as asset owners. In regards to water, CalPERS has recently launched a study and framework to evaluate physical risks of climate change with Woods Hole Oceanographic Institution, many of which are water-related. CalSTRS has committed to study water risks in their real asset portfolios, engaged with companies on water risks in agriculture supply chains and is now serving on the advisory committee of the Investor Water Hub. CalPERs and CalSTRS board member Betty Yee, the California State Controller, has also highlighted the need for investors to consider information on water risk impacts.
Additionally, ISS has released white papers highlighting SDG 6 regarding water scarcity and rights to water. Ceres works with these, and other, firms to share best practices regarding the evaluation of water portfolio impacts and engages with companies who are at risk.
Is SDG the same or different than SRI and ESG – can you tell us what these terms mean?
In 2015 the United Nations General Assembly adopted the 2030 Agenda for Sustainable Development that includes 17 sustainable development goals (SDGs). The SDGs provide a broad blueprint for both developed and developing countries that espouse peace and prosperity for people and the planet. SDG 6 is the goal addressing clean water and sanitation.
“ESG (environmental, social, and governance) Investment” is often used as an umbrella term for SRI (socially responsible investing), impact investing and mission-related investments. At their core, ESG investments consider environmental, social and governance factors alongside—and as critical influencers of—financial performance.
SRI is Socially Responsible Investing, which looks at investment practices through the lens of ESG issues.
How big is the water crisis in America and globally?
Many sectors of the economy face extraordinary risk from the twin challenges of water scarcity and water pollution. For eight consecutive years, The World Economic Forum has listed the water crisis among the top-five risks in terms of impact and likelihood. Growing competition for water, combined with weak regulations, failing infrastructure, pollution and climate change impacts threaten water security.
According to UNICEF and the World Health Organization, one in three people globally do not have access to safe drinking water and a recent WRI report indicated that 17 countries, home to one-quarter of the world’s population, face “extremely high” water stress, while 44 countries, home to one-third of the world, face “high” levels of stress. The impacts stretch around the globe – from South Africa to India to California. These pressures create profound risks for businesses, the environment and communities.
How do you think executive compensation should tie into how companies are addressing water?
With a number of global corporations and NGO partners we developed the Ceres Aqua Gauge, which is an approach to help companies assess their internal water governance and management strategies. There is broad agreement that best practice, especially for companies with high water needs and risks, is for executive compensation to motivate and reward named top leadership in companies for their performance in implementing corporate water strategy. In addition, companies need board level expertise and formal board oversight of water and sustainability factors when material.
There was broad agreement that the best practice, especially for companies with high water needs and risks, is for executive compensation to be tied to performance around water strategy development and success. In addition, these companies need board level expertise and oversight of water and sustainability factors.
What companies or sectors face significant challenges related to water?
Ceres worked for over a year with the Sustainability Accounting Standards Board (SASB) and mapped which industries were deemed to have medium to high exposure to water use and wastewater risk. These were then mapped against the major investment indices. We found that the majority of holdings were in medium to high water risk sectors such as oil and gas, food and beverage, semiconductors, chemicals, electrical utilities, metals and mining.
From farm to factory, producing food is the most water-intensive business on earth. Seventy percent of human water usage is spent irrigating crops and raising animals. Yet, over one third of total food production is in areas of high or extremely high-water stress, or competition. The vast majority of the food sector’s water use and water pollution footprint is associated with the agricultural supply chain.
In October, Ceres will be releasing the third addition of the Feeding Ourselves Thirsty benchmarking report ranking over 40 of the largest food sector companies on how they are responding to water risks. Stay tuned.
What steps can an investor take to incorporate water into their investment decision making and portfolio management?
Investors are increasingly aware that the 21st century economy will be shaped by powerful ESG factors with water being a growing issue. Through the work of the Investor Water Hub (IWH), Ceres created the Investor Water Toolkit (IWT) to help investors navigate water risks across assets classes and drive deeper consideration of water in investment decision-making. Some good first steps to understand and integrate water include:
- Developing an investment and proxy voting policy related to water.
- Map where water risks lie within your different asset classes and portfolios.
- Provide portfolio managers and analysts with sector specific guidelines.
- Develop a strategy that deals with high water risk exposure holdings. This could include engaging companies to underweighting or selling holdings.
The Investor Water IQ Quiz is a quick way to determine how water-ready a firm’s investment process is:
On a positive ending note any big names or sectors you think are doing a good job addressing water risk?
There are many companies that have made important commitments to managing water resources in their operations and supply chains. For example, Mars Inc. recently released context-based water targets, which set different water-related goals depending on the challenges faced in different watersheds. This is important as water management issues and solutions can be very local in nature.
Another example is General Mills. The company has analyzed its water risk exposure across 41 watersheds accounting for 15 ingredients in 36 sourcing regions. The assessment used several tools and accounted for a range of challenges from stakeholder conflict to regulatory risk. They also set 10 sustainable sourcing goals to measure performance against a range of different platforms and certification schemes.
Finally, Levi Strauss & Co. renewed its 2025 water commitments to include strategies that address specific risks at multiple parts of its value chain. In addition to sourcing more sustainable cotton in its supply chain, the company is working with suppliers to set water use and reduction goals that correspond to the local water risks. The company is also increasing consumer awareness on water risk, adding labels to products that show they were made using water efficient techniques. They also found that by saving on water they were also able to save money and energy use. Highlighting the strong business case—that focusing on water can pay off quickly.
Water makes life possible and is essential to our economy. But in many parts of the United States and around the globe, freshwater resources are in jeopardy due to growing demand, pollution and climate change. These pressures create profound risks for businesses and communities. We can no longer afford to place so little value on water. It will cost us all too much.
Ceres builds investor and business leadership to protect freshwater supplies around the globe, integrating capital market solutions into everything we do. We seek to turn smart water management into a business fundamental and water stewardship into an economic imperative.